My first effort at seeking the bottom in BHP had mixed results. I did get a good bounce to just over $34, but the momentum subsided and the stock retreated again. The Boston explosions and premature comments by our government spokesman that it was probably by “terrorists” (why not simply condemn an act of terror?) didn’t help our open yesterday and the BHPKME were stopped out when the stock touched $31.26 momentarily before closing at $32.15.
While the momentum indicators on BHP are still mixed, there are now some influential market commentators joining in. Below $32 BHP is offering sufficient value and yield (over 4%) to justify re-entering the stock, particularly in the light of how hard the banks and retailers have run.
The most conservative way to play this is to buy and hold the underlying shares. The downside risk now looks limited to about $2 and the upside potential is maybe $5 without any real change in fundamentals, just an improving sentiment.
For the most adventurous, I have selected the BHPKMO mini long warrant issued by Macquarie. It has a current strike price of $28.9451 and a stop price of $30.30. With the stock at $32.15 the expected entry price is $3.21
If you prefer to play it slightly more conservatively, then the BHPKMH has the benefit of a lower stop at $29.16, low enough one would think to allow you to relax more at night and let the warrant run on for the rest of the year in the hope that the year as a whole will see resources bounce considerably along with the market.
That’s the holy grail of trading these mini-long warrants. Find the bottom of a long down turn and then run the long up trend. I’ve done this a few times now in stocks like BHP and RIO and Linc Energy and the rewards for getting them right make the odd failure (like BHPKME) worthwhile. If BHP runs up to $42, then your gain is almost cent for cent with a shareholder for a fraction of the outlay. The BHPKMO would be trading around $13.00 at that point.
Because there is no time erosion as there is with a long call, and interest rates are currently low, the creeping strike price rises quite slowly (interest cost of the effective borrowing is built into the strike price) so one can reasonably hold a mini long warrant for some months if necessary.
You get no dividends, but the strike price is reduced by the amount of the dividend.
I once again warn that it is possible for the entire investment in a mini-warrant (but not more than the entire investment) to be lost if a stock dives straight through the strike price. For the elimination of doubt, the issuer wears any loss in the event it plummets below the strike price before their hedge is unwound.
The other stock that looks to me like it should rebound to above $1.00 is Arrium. In addition to buying shares at 82c for the longer haul I have gone long some ARIKMD as a top up for a bounce back to $1.00 or more. This is a relatively conservative play as the strike is at 36.84 cents and the stop at 46 cents. Its gearing is 42% so its more like using a temporary internal margin loan for a few weeks,
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John Aldersley is the CIO of AldersleyCapital, a “tax-aware” investment manager of separately managed accounts within the Phillip Managed Accounts. He can be contacted by email to john.aldersley@aldersleycapital.com or by visiting www.aldersleycapital.com. |
